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Changes to EPA’s Cost-Benefit Guidelines

August 6, 2009

EPA has been quietly working on some serious changes to the guidelines it uses to conduct cost-benefit analysis. Tweaks to the powerful but low-profile Guidelines for Preparing Economic Analyses could have major impacts on the environment. The Guidelines is little known outside of the agency, but is used in the design of every major environmental regulation.

Here is a breakdown of the four most significant changes being considered:

1. Stop Inflating Compliance Costs: Too often, the compliance costs of regulations are over-estimated because worst case adaption scenarios are used; i.e. industry innovation of new, low-cost solutions are not considered. The new Guidelines would clarify how environmental regulations can lead to innovations that significantly reduce compliance costs over time.

2. Focus on Climate Change: The old Guidelines focused on “traditional” environmental problems like smoke stack emissions but failed to address the complexities of new, emerging problems, such as climate change. The new version would zero-in on these newer problems as the preeminent environmental threats.

3. Measure Ecological Consequences: The Bush Administration routinely failed to consider the full range of indirect environmental implications of its regulations, especially when it came to climate change. The new recommendations warn analysts that focusing only on impacts that can be monetized will often skew towards under-regulation.

4. Look at Under-Regulation: Corrections in the Guidelines would encourage cost-benefit analysis of deregulatory and non-regulatory proposals. During the Bush Administration, deregulation of everything from air quality controls to mining practices as well as voluntary (read unenforceable) “solutions” to environmental problems went without any economic analysis.

The combined effect of these changes would be a more balanced approach to the way environmental regulations are judged: bringing equilibrium to the cost and benefit sides of the balance sheets and removing economically unjustified impediments to rules.

Policy Integrity will continue to closely follow the Guidelines. We were the only public interest organization to submit written comments last fall and to participate in public meetings last spring. Many of the proposed changes in the Guidelines track our recommendations.